Bankruptcy Basics

The goal of filing bankruptcy is to get relief from your debts and a fresh start by having your debts discharged.  The discharge order issued by the court in a successful bankruptcy case prevents most creditors from attempting to collect a debt from you in the future.  Some debts cannot be discharged, like alimony, child support, certain taxes and certain student loans

Almost as important as the discharge that you get at the end of your case is the automatic stay that goes into effect the instant you file your case.  The automatic stay  is like an injunction that forbids anyone from taking or continuing any action against you until authorized by the court.  No matter where a creditor is in the collection process, the automatic stay stops everything cold, instantly.  If your house is up for foreclosure sale tomorrow and I file your case today, the sale is cancelled.

If you buy something on time, the bank or finance company usually has a security interest, like a mortgage, which allows them to repossess the item if you don't pay.  A discharge of the debt does not remove the security interest.  The bank cannot make you pay, but it can seize the property and sell it to get repaid.

When you file bankruptcy, you have 3 choices to make with secured property, like your financed car,  You can Surrender, Redeem, or Reaffirm.  Surrender means give it back.  Redeem means pay the loan in full.  Reaffirm means to sign a reaffirmation agreement.

To reaffirm means you enter into an agreement called a "reaffirmation agreement" in which you agree with the lender that between the two of you, it's like your bankruptcy never happened.  You agree to keep making the payments, and if you don't, the lender can repossess the car and still make you pay the balance after the car is sold.  

Individuals and married couples can typically file either a Ch. 7 or a Ch. 13 bankruptcy case. A Ch. 7 case is a liquidation, where the trustee takes your property, sells it and pays your debt as far as the money goes, then you get a discharge.  A Ch. 13 is a reorganization, where you keep your property and propose a payment plan to pay some or all of your debts over time, up to 5 years.

Ch. 7 is generally the best option, if you qualify, and you are current on your house and car payments.  You can typically qualify to file Ch. 7 if your household income is low enough, or most of your debts are business related.  If you make too much money, or you are behind on a car or house and can't catch up, you may need to file Ch. 13.